In 2000, Lawrence Summers (Treasure Secretary) stated in The Wall Street Journal that "The constant pursuit of [that temporary] monopoly power becomes the central driving thrust of the New Economy."

The statement is the total opposite of what the recent antitrust rulings against Microsoft concluded.

What Summers is saying is that monopolies are necessary for innovation, and that the government should never intervene with, for example, Microsoft or Intel and their dominant positions.

His reasoning, and with him dozens of other experts, is that the New Economy's costs are almost exclusively upfront, in the development phase, and the manufacturing and distribution costs are close to zero. New Economy companies get rewarded for innovating extremely quickly and then grabbing a huge share of the market before some other innovation comes along and destroys them. Once they are in that position, they build a barrier and discourage new entry, creating a monopoly position. Current antitrust regulation is in place to prevent that, but Summers argues that that is the wrong action to take... If it weren't for that monopoly, a product's price would go down to whatever the marginal cost is, the high fixed costs from the development phase cannot be recovered, thus factually limiting and almost destroying innovation.

An excellent example is a browser: the more people own a particular browser, the more attractive that browser gets, and the higher the "switching costs" get (that is, the cost to switch to another browser). It quickly gets to a point where a quasi-monopoly is created, and where it is virtually impossible for others to enter the browser market. If the government intervenes with antitrust regulations (like what happened in the Internet Explorer case), though, innovation will be slowed down to a crawl (MS doesn't want to spend a bunch of money on IE anymore, since they don't have that monopoly anymore).

Who knows... maybe without the government's intervention, we would have actually had a secure Internet Explorer ;)

December 1st, 2005, 01:51 AM

Egaladeist

Hi Negative,

Quote:

A monopoly is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent on Viagra.

In an oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. Assume, for example, that an economy needs only 100 widgets. Company X produces 50 widgets and its competitor, Company Y, produces the other 50. The prices of the two brands will be interdependent and, therefore, similar. So, if Company X starts selling the widgets at a lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as well.

There are two extreme forms of market structure: monopoly and, its opposite, perfect competition. Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand. Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits.

For the consumer competition is the ideal choice...that includes consumption by big business...eg. even big business are consumers...if these businesses had to purchase from a monopoly and had to pay the asking price in a monopoly economy...they would have to raise their prices to reflect their costs...
perhaps if Microsoft was left in a monopoly situation IE may have become more secure ( or not ), as you suggest...however, if we were to allow monopolies across the board this would be disasterous to the consumer...which includes business.

Legally only government can control an monopoly...in theory that is because it serves the people and ulimate control rests with the people...so...in theory, the people/citizens own the monopoly.

To allow private business to have a monopoly could be very dangerous to the economy...if I have a patent to a product and have sole economic interest in it ( a monopoly ) ...let's say ' rubber '...you can imagine how many products I would have control over because of their need to use my product...in essence if I have control over rubber I have control over every business and product dependant upon the rubber I provide...not only would I have a monopoly on rubber but also be able to exert control over tens of thousands of other products dependant upon rubber...I could crush the economy by raising my prices or simply by refusing to ship...with that much power and influence at my disposal who then would be in control of the government?

The way Summers meant it, in my understanding, is that those monopolies are/should be temporary monopolies (or "transitory, fragile monopolies").

The rubber example is a nice example of an unfavorable monopoly situation, but isn't exactly New Economy (Summer's comments aren't about the Old Economy... he was in favor of antitrust for Old Economy) ;)

I also see a difference between an absolute monopoly (meaning a government-controlled monopoly, like your examples of public utilities, where it is illegal for private corporations to offer the same service) and a monopoly that arose because of high entry costs, for example. Look at the oil industry (an oligopoly, but the principle is the same): everybody's allowed to enter that industry, and looking at the profits it looks like the business I'd like to be in, but I can't... not because I'm not allowed to, but because of the extremely high entrance costs.

Look at it like this: Microsoft spends $1 billion on the development of a new innovative piece of software. To recup those costs, the only way is to get that piece of software to as many consumers as possible in as little time as possible, and to grab as big a piece of the market share as possible. Since it's the only product of its sort, it soon reaches 95% of the market. If it's at that level, it's virtually impossible for any other product to get a piece of the market: another company would also have to spend $1 billion to develop a competing product, but they wouldn't (since there's only 5% of the market left, and that's not worth the investment). And that's where the SEC would step in: it would conclude that Microsoft is a monopoly, and it would force MS to give up part of its market share since monopolies are illegal. Is that fair? Next time, MS won't spend $1 billion on a new innovative product: what's the point, anyway? Thus, Summer's conclusion is: monopolies are necessary for innovation :)

December 1st, 2005, 02:41 AM

Egaladeist

Hi Negative,

But that is why we developed a patent system...to allow people who invest in development to recoop their cost and gain a reasonable share of profit before it is placed in the open market.

The patent process gives the creator/inventor a reasonable time to market their product/s exclusively.

Therefore allowing, as you said, a ' temporary monopoly ' to exist...

we could restructure the patent system to allow for more time or extensions as they have with copyright ( if they don't already exist )...and that would serve the same purpose.

In a profit driven economy I agree that the bottom line to innovation is profit...if there's no profit to be made there's no incentive to be innovative.

Nuclear waste is a perfect example of this...nuclear waste can be recycled and used as fuel...but we don't recycle it because the cost to recycle it at this point would only be equal to the profit to be made from it...they cancel each other out...therefore why would anyone invest in such a thing.

Monopolies therefore, in a profit driven economy are essential...however, are regulated already through the patent office by limiting the term of the patent.

I see no need to further enhance the existence of monopoly based firms.

Eg ;)

On the issue of investment...most successful firms look well into the future...sure Microsoft can flood the market and take the potential competition out of the equation...for a time...but re-sale is the higher end of the equation...if after Microsoft floods the market you were to invest in a cheaper yet reasonable alternative to that product you can take a large bite out of the resale market...eg.

generic drugs...have not only survived but flourished in the resale marketplace by providing a cheaper alternative. ;)

December 1st, 2005, 01:35 PM

nihil

Hmmm,

Summers would flunk grade school economics over here. He does not understand the difference between being a monopolist and a market leader.

All for profit organisations strive to be the market leader. There is nothing wrong with that. Also there is nothing wrong with recouping your development costs, as EG~ pointed out, that is why we have patents. This is not a "monopoly" in the true sense, it means that you are the sole provider of your product.

Where Microsoft, Intel and IBM before them fall foul of anti monopoly laws is in their dirty tricks department.............retrospective discounts, sole supplier agreements, contracts in restriction of trade. In other words, there already is a competitor and you are trying to use your corporate muscle to squeeze them out.

I have worked for a company that had an effective monopoly. We were the only people in the World who manufactured the product. This did not make us vastly wealthy, as the major customers were mental institutions and prisons. It was not worth any of the big boys' time to attempt to compete with us because the market was not big enough.

There are quite a few of these "niche markets", where there is an apparent "monopolist", but that is not really the case, as the market will only stand a certain price, and can only offer a certain market volume.

Microsoft and Intel do not have any significant monopolies that I am aware of...............they just use dirty tricks to try to create them ;) That is when they fall foul of antitrust legislation?

Just a few initial comments :)

December 1st, 2005, 02:01 PM

Negative

I'm sure Summers understands the difference between a monopolist and a market leader... that's why he calls it a temporary monopoly - quite different from the traditional monopoly you learn about in "grade school economics" ;)

The transitory monopoly situation that must be created after the release of a new product in order for New Technology companies to remain innovative is a combination of patent and copyright rules and monetary policies designed to protect that company's investment. It must make it impossible for competitors to enter the market at least until development costs are recouped, and right now that is illegal under antitrust law. If "old" monopoly and antritrust laws would have been applied to Microsoft, it would have been forced to, for example, give up all of its source code. That did not happen, though - the case was settled. And that's exactly what this is about: current antitrust laws are more than 100 years old (the Sherman Act dates from 1890) and, many argue, should be revised for New Technology. If we would have applied them to those cases, Microsoft wouldn't even exist anymore, and neither would Intel or IBM...

December 1st, 2005, 02:55 PM

nihil

Quote:

The transitory monopoly situation that must be created after the release of a new product in order for New Technology companies to remain innovative is a combination of patent and copyright rules and monetary policies designed to protect that company's investment. It must make it impossible for competitors to enter the market at least until development costs are recouped, and right now that is illegal under antitrust law.

And so may it remain illegal, forever and a day. If you have two corporates competing............they are supposed to do that right? then both could have expended serious funds on developing similar products. They MUST be allowed to compete or one will lose out.

It is NOT the duty of the state to protect a private corporation's investment. It is its duty to protect the interests of the citizens who elected it, the majority of whom are neither stockholders nor employees.

This guy must be on stock options or something?

If you do what he is suggesting there is no hope for better quality, more secure software..........."if we get in first lads we can market any crap we like"....... :eek:

This sound like some sort of "cowboys' charter".............a company developing similar products but with greater care and dilligence will be penalised.

And this guy obviously has not heard of the word "cartel" because that is what it will breed. The big boys will get together in some sleazy strip club and divide the World between themselves.............it has all happened before.

Anyways, if your product is half decent, you should have recouped your development costs long before anyone else can come into the market.

The obvious problem is the source code or technical documentation. That should NEVER be required to be disclosed. It is the property of its developers. Certainly that is how our laws look at it :)

Otherwise, if you wish to enforce disclosure, you must enforce licence fees..........that would recoup the R&D costs?

:)

December 1st, 2005, 03:32 PM

Negative

But those are two contradicting views, nihil...
If it's not the duty of the state to protect a private corporation's investment, then how could it be the state's duty to enforce antitrust laws? You can't have it both ways: either you believe that the government should enforce antitrust laws and break monopolies, or you believe that it should let the market do its thing... but not both at the same time.

There's no need to attack the man, nihil... might want to read his biography before you accuse him of not knowing what a monopoly is, or what a cartel is :rolleyes:

Let me build on your example ("Anyways, if your product is half decent, you should have recouped your development costs long before anyone else can come into the market"). That's exactly the problem: under current antitrust laws, you would be forced to let others into the market. Those laws don't just attack monopolies, they make sure the market is open to everyone.

Here is one of the most famous interpretations of the Sherman Act (Judge Learned Hand's opinion, which is still upheld today): after finding out that Alcoa controlled 90% of the aluminum ingot market, the judge's task was to find out whether or not Alcoa held a monopoly. His conclusion (and the conclusion that is drawn time upon time when interpreting the Sherman Act): yes, it is holding a monopoly. Why? Simply because of the huge market share.
"It was not inevitable that it should always anticipate increases in the demand for ingots and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization."

That is what the Sherman Act is about: you have a 90% market share? Stop it! You're a monopoly! Du Pont got sued for owning 75% of the cellophane market. Why? Only because of that percentage!

And now about the difference: producing aluminum ingots is pricey. There's no need to protect Alcoa's interests since few others have the monetary means to produce aluminum ingots, which creates a "natural" monopoly. Software (and any other intellectual property for that matter) on the other hand is extremely cheap to manufacture (1 cent per CD? Probably somewhere around that price) - if you don't protect the development investment (through patents, copyrights as you correctly point out), nobody's going to develop software anymore. And that is the entire problem: everybody could get into that market because the manufacturing is so cheap, and lots of them try to get into the market. How do they try to get into the market? By using antitrust laws to force software companies to give up their code... current antitrust laws allow for patent and copyright protection to be destroyed - all you need to do is complain about the 75% market share a software product has, and bam! you have your antitrust case... and that's not a problem?

December 1st, 2005, 04:27 PM

nihil

Hey, Neg~ we are arguing at crossed purposes here?.......................you are talking US law and I am talking UK law.

Quote:

But those are two contradicting views, nihil...

No, they are not over here ......our monopoly laws are designed to protect the consumer, not the corporation. It is not the duty of the government to "break" a monopoly, only to regulate it. Not all monopolies are bad, per se. For example you do not want two railway services, two bus services etc at the same time and place. That would be an enormous waste of resource?

Remember that we have an element of socialism in our politics that would be unheard of in America?

Your laws are obviously flawed. Over here you cannot close the market down, nor can you demand access to someone else's intellectual material (someone would actually want the source code for Windows?) You are allowed to compete on the back of your own endeavours.

As for % share of the market, that is totally irrelevant in a free market economy...........vox populi vox Dei?.............seems that this is not a political problem, but a "brown envelope problem"

BTW I do not read biographies unless the toad has been dead for at least 50 years ;)

I would sooner trust a lawyer :p

December 1st, 2005, 04:40 PM

Negative

No, I was talking Belgian law... of course I was talking US law :p
The Sherman Act isn't British, is it? ;)

The entire point is this: "old" antitrust laws shouldn't be applied to New Technology cases.

Quote:

It is not the duty of the government to "break" a monopoly, only to regulate it.

But how can you regulate something without enforcing it? The government only makes a rule that says monopolies are illegal, but doesn't do anything about it?